Crunch time

For anyone considering a career in economic forecasting, the Bank of England’s inflation report for August 2007 ought to be required reading. A graph illustrating its Monetary Policy Committee’s ‘best collective judgment’ of annual economic growth two years ahead is fixed around a central prediction of 2.5 per cent, with extreme boundaries of 0.8 per cent and 4.2 per cent. But after two years, economic growth was running at –5.6 per cent, and the economy had just completed its fifth consecutive quarter of negative growth. The finest minds of Threadneedle Street could not see two years ahead.

The Bank of England’s August 2007 forecast for the economy

In this case, the Bank of England could not even see a few days ahead, because no sooner had the ink dried on their inflation report than, on 9 August 2007, the international credit markets froze, precipitating the Northern Rock crisis, followed a year later by the collapse of Lehman Brothers and what was to become the deepest recession that the developed world had seen since the 1930s. When touring a business school, the Queen famously asked: ‘Why did no one see it coming?’ The answer is simple: economics cannot predict the future, because there are too many variables.

Ten years on, there is scant sign that this lesson has been learnt. Shocks are inevitable; the best we can do is prepare for them by keeping debt low and controlling public borrowing. Yet we are now in the tenth year of markets pumped up by low interest rates and easy credit — in some forms it is even easier to obtain than it was a decade ago. The world of 125 per cent mortgages has gone, only to be replaced by personal contract purchase loans on cars, pushed at people on low incomes.